1. To accelerate real GDP growth and reduce poverty, the authorities
of São Tomé and Príncipe have undertaken a program of economic reforms
for 2000-02, in support of which the Fund approved on April 28, 2000
a three-year arrangement under the Poverty Reduction and Growth Facility
(PRGF), in an amount equivalent to SDR 6.657 million (90 percent of
quota). Despite an unforeseen terms of trade deterioration, substantial
progress was made in the implementation of the program during the first
ten months of 2000. The government continued to strengthen its monetary
and fiscal management and accelerated the implementation of a number
of structural measures, including in the area of civil service reform
and the drafting of oil legislation. All performance criteria and benchmarks
at end-June 2000 were observed, with the exception of the quantitative
performance criterion on the primary fiscal surplus, the structural
performance criterion on the privatization of large plantations and
land ownership (which was implemented with a three-month delay), and
the quantitative benchmark on government revenue.

2. This letter, which updates and supplements the memorandum of economic
and financial policies dated March 24, 2000, takes stock of program
implementation during the first half of 2000 and describes the corrective
measures adopted during the third quarter, as well as the specific objectives
and measures envisaged for end-2000 and the first half of 2001. In support
of the corrective measures that have been implemented and the objectives
and measures envisaged, the government requests a waiver for the nonobservance
of the two performance criteria. In view of São Tomé and Príncipe's
very heavy external public debt burden, the government would also like
to receive assistance as soon as possible from the Fund, the World Bank,
and the international financial community under the enhanced Initiative
for Heavily Indebted Poor Countries (HIPC Initiative).

Program implementation during the first three quarters of 2000

3. Program implementation during the first ten months of 2000 was adversely
affected by a 1.5 percent deterioration in the terms of trade, compared
with an initial projection of an improvement of 11 percent. This terms
of trade shock reflected continued weakening in the world prices for
cocoa, the country's main export crop, which are 10 percent lower than
program projections, and continued increases in the import prices for
petroleum products, which are 30 percent higher than projected. Nevertheless,
the satisfactory results achieved under the staff-monitored program
during 1998-99 were generally confirmed during the first half of 2000.
Economic activity continued to recover, owing to a strong pickup in
food crop production, construction, and tourism, and real GDP growth
is still expected to reach 3 percent in 2000, in line with initial program
projections. However, the surge in petroleum prices led to higher-than-programmed
inflation—11.5 percent at end-October, on a 12-month basis, compared
with 13 percent at end-December 1999. It is now expected that consumer
price inflation will decline to 9 percent at end-December 2000 but will
remain above the initial program objective of 5 percent. The dobra also
depreciated by 17 percent against the U.S. dollar and by 3 percent against
the euro during the first ten months of the year, and the external current
account deficit (including official transfers) could narrow slightly
to 25 percent of GDP in 2000, as initially projected, despite the postponement
of petroleum exploration-related investments.

4. In the fiscal area, the nonobservance of the performance criterion
on the primary budget surplus stemmed from tax and customs revenue shortfalls,
which were themselves due to two reasons: (1) the government's delays
in adjusting petroleum retail prices led the petroleum product distribution
company (ENCO) to accumulate tax arrears in an amount greater than Db
5 billion on import duties and consumption taxes; and (2) the authorities
did not eliminate ad hoc customs exemptions, as envisaged in April 2000,
to offset the revenue shortfalls resulting from the implementation of
the new customs tariff and the elimination of export taxes.

5. In June 2000, to correct the fiscal slippage registered in the first
half of the year, the government (1) eliminated all ad hoc tax and customs
exemptions and tightened controls over legal exemptions; (2) introduced,
with assistance from customs authorities in partner countries, a system
to monitor and control values declared at customs, including a periodic
updating of the file of import unit values; and (3) raised petroleum
product retail prices to reflect world prices and distribution costs.
The government also continued to strictly monitor expenditure commitments,
including the wage bill, and centralized all government bank accounts
at the treasury. The implementation of these measures enabled ENCO to
pay all its tax arrears during July-October, and the quantitative benchmark
on total government revenue for end-September 2000 was almost observed.
The primary budget surplus also rose to Db 4.4 billion at end-September
(compared with a program benchmark of Db 7.1 billion) and Db 4.7 billion
at end-October 2000, in spite of spending overruns necessitated by (1)
protracted maritime border negotiations with Nigeria, (2) higher costs,
explained by price increases, in the government consumption of petroleum
products, water, and electricity, and (3) a larger wage bill caused
by delays in the implementation of the civil service reform and the
downsizing program.

6. Monetary developments during the first nine months of 2000 were
characterized by a 14.5 percent expansion in the stock of money and
a 5.3 percent increase in credit to the private sector. The central
bank maintained the reserve requirement ratio at 22 percent and its
reference interest rate at 17 percent, and commercial banks reduced
their deposit and lending rates by 5 percentage points to about 19 percent
and 33 percent, respectively, at end-September 2000. Net bank credit
to the government increased by about 11 percent of beginning-of-year
broad money, reflecting the nonmobilization of the oil concession rights
projected under the program. Adjusted for this shortfall, the performance
criterion at end-June and the benchmark at end-September on net bank
credit to the government were observed. The performance criteria and
benchmarks on the net domestic assets of the central bank and the net
international reserves of the central bank were also observed.

Macroeconomic framework for the last quarter of 2000 and for 2001

7. To achieve the program objectives for end-2000 and during 2001,
and especially to contain inflation, the government will pursue prudent
fiscal, monetary, and exchange rate policies. It will also implement
a range of structural reforms.

8. The fiscal program was also slightly modified to reflect the external
environment, the recent Paris Club rescheduling, possible interim assistance
under the enhanced HIPC Initiative, and the fiscal impact of maritime
border negotiations with Nigeria. The objectives are to narrow the overall
fiscal deficit (on a commitment basis and including grants) from 26
percent of GDP in 1999 to 18.2 percent of GDP in 2000, and to 13.0 percent
of GDP in 2001; and to increase the primary budget surplus (excluding
foreign-financed investments) from 1.3 percent of GDP in 1999 to 2.1
percent of GDP in 2000, and to 2.7 percent of GDP in 2001, excluding
the enhanced HIPC Initiative-related spending plan. Including this spending
plan, which has been prepared in consultation with Fund and World Bank
staffs, the primary budget surplus should be 0.8 percent of GDP in 2001.
Before end-December 2000, the government will submit to parliament a
draft budget for 2001 that will conform with fiscal data for 2001 indicated
in paragraphs 8 through 12. The budget will be based on a continued
broadening of the tax base and a containment of spending. All external
payments arrears were settled in May 2000 with the Paris Club rescheduling;
domestic payments arrears were also cleared at the same time. The government
will not accumulate any new external or domestic payments arrears during
the program period.

9. Government revenue (excluding grants), given the higher import prices
of petroleum products and the recent nominal depreciation of the dobra,
is expected to increase by 19 percent in 2000 (to Db 77 billion, or
20.8 percent of GDP), compared with an initially projected increase
of 16.5 percent (to Db 75 billion, or 20.4 percent of GDP). For 2001,
revenue is projected to increase by 15.6 percent (to 88.8 Db billion,
or 21.7 percent of GDP). The authorities are now using the SYDONIA computerized
system to determine the base and calculate the amount of customs duties.
They will continue to strengthen the tax inspection and audit units
of the finance directorate and the customs administration, and to apply
the automatic mechanism by which adjustments of petroleum product retail
prices reflect import prices and distribution costs, which was agreed
with ENCO in 1997. By end-January 2001, the authorities will complete
a study on streamlining the domestic indirect taxation system, with
a view to simplifying the general sales tax and to broadening its base
to cover domestic goods and services (such as hotels, restaurants, and
maintenance and repair services) by end-March 2001.

10. In the expenditure area, primary outlays during 2000 are expected
to be higher than projected because of overruns on spending on goods
and services, owing to maritime border negotiations with Nigeria (which
cost US$300,000, or Db 2.5 billion as at end-October), as well as higher
energy costs, and a larger wage bill. Primary expenditure would rise
to 18.7 percent of GDP in 2000 (compared with an initial projection
of 18.1 percent of GDP), and to 21 percent of GDP in 2001.

11. The wage bill will expand to 7.8 percent of GDP in 2000, compared
with a limit of 7.3 percent set under the program. The government prepared
a report identifying redundant civil servants in April 2000, as planned,
and submitted to the National Assembly in October 2000 a draft law governing
severance conditions in the civil service. It will implement the organizational
and staffing plans for all ministries by end-December 2000. The reduction
of the size of the civil service expected from the implementation of
the administrative reform program is estimated at about 500 employees,
and the severance costs associated with the civil service downsizing
at Db 8 billion (US$1 million). These severance costs, for which financing
is sought under the European Union structural adjustment facility, have
been included in the budget for 2001. By end-December 2000, the single
computerized system for civil service management and payroll will be
made operational, and the study on the civil service salary scale (aimed
at streamlining the wage scale and introducing a compensation and promotion
system based on performance evaluation) completed. Under social pressure,
including in schools and health centers, the government has agreed to
grant a general salary increase starting January 1, 2001, as well as
monthly transportation and risk allowances to the 2,500 education and
health sector employees. However, given the inflation and budget deficit
objectives, the size of these adjustments will be limited, with a view
to containing the increase in the wage bill at 6.6 percent in 2001.
The implementation of this wage policy will help reduce the wage bill
ratio to 7.5 percent of GDP. The second Poverty Reduction and Growth
Facility (PRGF)-supported program review will, inter alia, follow up
on progress made in the area of civil service reform.

12. The government will aim at increasing spending on education to
15.3 percent of primary expenditure in 2000 (8.5 percent of GDP) and
17.1 percent of primary expenditure in 2001 (9.3 percent of GDP); and
spending on health care to 16.2 percent of primary expenditure in 2000
(9 percent of GDP) and 17.3 percent of primary expenditure in 2001 (9.5
percent of GDP). The government has prepared sectoral development strategies
for agriculture (October 1999), health (June 2000), and education (June
2000) with technical assistance from the World Bank and the United Nations
Development Program (UNDP). It will finalize the strategies for infrastructure
maintenance by end-December 2000 and for tourism in June 2001. The government
will consult with the Fund and the World Bank by end-February 2001 regarding
the overall size and the content of its three-year public investment
program (PIP) for 2001-03. This program will give priority to human
resource development and infrastructure maintenance. The authorities
will also consult with World Bank staff, in the context of a public
expenditure review to be completed by end-September 2001, that will,
inter alia, cost the health and education sector strategies. In general,
the government will continue to hold quarterly meetings on the monitoring
of public investments with the participation of the main donors in São
Tomé and Príncipe, in order to improve the selection and execution of
PIP projects. It will also carry out a detailed study on the execution
procedures for public investment expenditure by end-March 2001 and,
with donor assistance, conduct an audit through an external independent
firm on all government procurement contracts exceeding US$500,000. The
audit and study should help improve the procurement system and procedures,
develop a mechanism to control and monitor the execution of foreign-financed
investment projects, and centralize all project accounts under the financial
control of the treasury. The publication of the audit report constitutes
a structural benchmark for end-March 2001.

13. The central bank will pursue a prudent monetary policy aimed at
lowering the 12-month inflation rate to 9 percent by December 2000 and
5 percent by December 2001. The resumption of the disbursement of nonproject
external assistance during the fourth quarter of 2000, the provision
of further debt relief, including possible enhanced HIPC Initiative
assistance (starting in 2001), and continued improvement in the fiscal
management should make it possible to reduce net bank credit to the
government by 19.5 percent of the beginning-of-year money supply during
2000 and by a further 12.9 percent during 2001. Credit to the private
sector would increase by 8 percent, or 1 percentage point less than
the inflation rate, and by 12 percent in 2001. The money supply should
increase by 16.8 percent in 2000 and by 10.7 percent in 2001 (in line
with the nominal GDP growth rate). The central bank's gross international
reserves would increase to US$15.4 million (4.2 months of imports) by
end-2000, and to US$19.7 million (4.8 months of imports) by end-2001.

14. The monetary authorities will keep the central bank's reference
interest rate above the observed inflation rate during the program period.
The government will adopt by end-January 2001 a decree-law authorizing
the central bank to issue central bank bills, which banks and other
economic agents will be able to acquire and sell at freely negotiated
interest rates, and the authorities will organize a domestic money market
beginning in April 2001.

15. The central bank will continue to strengthen bank supervision,
with a view to ensuring that banks continue to comply with prudential
ratios. It has also decided to strengthen its inspection services and
establish effective internal control over its operations, with technical
assistance from the Fund. In August 2000, the central bank published
a certification of its 1999 accounts by an independent, internationally
recognized audit firm. The central bank has decided to have its accounts
certified every year by independent external auditors.

16. In the exchange rate area, the authorities will make every effort
to ensure that their flexible, market-based exchange regime operates
effectively, thereby helping to keep the spread between the official
exchange rate and the parallel market rate very narrow. In these conditions,
the central bank will not attempt to influence commercial bank rates
and will limit its intervention in the exchange market strictly to achieving
its international reserves target. During June-August 2000, it held
public foreign exchange auctions, in which commercial banks declined
to participate, and changed the formula for calculating the official
exchange rate, which is now determined as the simple average of the
rates of commercial banks, exchange bureaus, the parallel market, and
foreign exchange sales. With this system, the spread between the official
and parallel market rates continued to fluctuate between 1 percent and
2 percent during July-October 2000. The central bank has decided to
conduct a study by end-February 2001 to assess the implementation of
the foreign exchange sales system and to devise a foreign exchange auction
mechanism that would include banks and exchange bureaus.

17. The government will take all steps required to accept the obligations
of Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement
as soon as possible. Furthermore, in June 2000, to strengthen the use
of the dobra, ENCO, the airport management company (ENASA), and the
port management company (ENAPORT) began to issue all their invoices
in dobras, with the exception of export transactions with foreign airlines
and shipping companies. The water and electric company (EMAE) and the
telecommunications company (CST) also introduced general billing in
dobras in October 2000.

Structural and sectoral policies

18. In the area of structural measures, the government will adopt a
mechanism under which adjustments in water and electricity rates reflect
production and distribution costs by end-December 2000. It will also
finalize a comprehensive analysis of the telecommunications sector,
with assistance from the World Bank, by end-March 2001, with a view
to improving the legal and regulatory framework and, eventually, opening
the sector to competition. Regarding business promotion, the government
will examine the report of the Foreign Investment Advisory Service (FIAS)
of the World Bank Group with the goal of developing, by end-June 2001,
an action plan to enhance the environment for private sector activity
and investment, particularly by strengthening the legal, regulatory,
and judicial systems. Having already liberalized trade and reduced the
customs tariff, the government intends to conduct an in-depth revision
of the investment code by end-March 2001, with a view to eliminating
all preferential tax regimes, with the exception of the regime applicable
to the free trade area.

19. With regard to public enterprises, the government will pursue the
implementation of its new reform and privatization program during 2000-01.
In May 2000, the government conducted a study of the various possible
alternatives for the future of EMAE (restructuring, leasing, concession
arrangement, or full privatization), with assistance from the World
Bank. By end-December 2000, it will select one of the options analyzed
in the study and will adopt a financial restructuring plan for the company,
including the introduction of an appropriate accounting and budgeting
system and the strengthening of revenue collection procedures, as well
as the establishment of a medium-term investment program and strategy
for the company. The government has already had external auditors certify
the accounts of the public enterprises ENAPORT and ENASA for 1998 and
1999. In addition, by end-January 2001, it will begin consultations
aimed at awarding the auditing of the accounts of EMAE (1995-98) and
ENCO (1999) to independent external auditors. In the agricultural sector,
the government adopted, in September 2000, a program to privatize large
government-owned plantations1 and promulgated
a decree-law simplifying real property and land ownership as a corrective
measure for the completion of the program review. The new decree-law
introduced a perpetual lease that guarantees permanent land-use rights
that are transferable to heirs and assignees and will be recorded in
the property register.

20. With respect to prospects for petroleum exploration, the government
will continue to ensure transparency in the conduct of future operations.
It prepared (and parliament adopted) a law on petroleum exploration
and production in São Tomé and Príncipe in June 2000, and it will adopt
the implementing decrees and administrative orders for this legislation
by end-December 2000. The government will continue negotiations with
Nigeria, with a view to promoting a joint development zone, and it will
keep the Fund and World Bank informed on these negotiations.

21. With donor support, and in consultation with civil society, the
government will prepare a progress report in April 2001 on the implementation
of the interim poverty reduction strategy paper (interim PRSP), dated
April 6, 2000, and a full poverty reduction strategy by end-2001. This
strategy should include measures designed, inter alia, to further raise
school enrollment and literacy rates, and improve primary health care.
In December 2000, the government will establish an interministerial
committee to monitor the implementation of its poverty reduction strategy
and adopt an administrative budget for the preparation of the PRSP.
The strategy calls for larger budget appropriations for the education
and health sectors. To ensure effective monitoring of the progress made
in reaching social and poverty reduction objectives, an African Development
Bank (AfDB)-financed household survey will be launched in January 2001,
a social database will be developed in the National Institute of Statistics,
and a set of indicators will be prepared by end-June 2001, with support
from the World Bank and the UNDP. The authorities will also organize
consultations with local communities in December 2000 on the interim
PRSP and boost the participatory process for the preparation, with civil
society, of the poverty reduction strategy in early 2001.

22. Regarding governance, the government will combat and take strong
action against any acts of fraud and corruption that come to its attention.
In the case of the fraudulent transfer of foreign exchange assets uncovered
in 1994, the official responsible for the operation was removed from
his position, tried, and sentenced to prison. As for the treasury bond
fraud attempt uncovered by the authorities in February 1999, the government
has dismissed and taken legal action against the officials involved.
In October 2000, it prepared a second progress report indicating that
the matter is still under judicial investigation and awaiting trial.
The second PRGF program review will, inter alia, follow up on the handling
of this case of fraud. In the judiciary, the government aims at strengthening
and modernizing courts and tribunals, training judges, and preparing
new legislation and codes in the various areas of criminal, civil, and
business law during 2000-02, with assistance from Portugal. In due course,
it will make operational the Auditor General's Office and establish
an arbitration tribunal for business disputes.

23. The government will intensify efforts to improve the quality and
timeliness of its statistical data, provide the Fund with the basic
data required for Article IV consultations, and strengthen program monitoring.
As indicated above, it will conduct a statistical household survey and
prepare a series of social welfare and poverty indicators to be monitored
in the context of its poverty reduction strategy. The authorities will
continue to ensure that monthly monetary survey data are available within
six weeks after the end of the month concerned.

External sector, debt sustainability, and financing assurances

24. In the external sector, the government will pursue its objective
of reducing the external current account deficit by applying the macroeconomic
and structural adjustment policies described in this letter, without
imposing restrictions on current transactions.

25. Overall, the external current account deficit (excluding official
transfers) is projected to narrow to US$22.9 million in 2000, or 49
percent of GDP (from 58 percent of GDP in 1999). Taking into account
the amortization payments due on external public debt (US$3.6 million),
the amount of external payment arrears (US$54.8 million) planned to
be cleared, and the target for reserve accumulation (US$4.5 million),
the gross external financing requirement would amount to US$85.8 million
in 2000. This financing requirement will be fully covered by project-related
grants and concessional loans (US$16.7 million), food aid and other
grants (US$2.6 million), private capital flows (US$3.7 million), IMF
disbursements under the PRGF arrangement (US$2.6 million), the first
tranche of the World Bank's public resource management credit (US$3
million), and the rescheduling of debt service (US$57.1 million). In
May 2000, the authorities obtained a flow rescheduling from Paris Club
creditors on Naples terms, with a 67 percent reduction in the net present
value (NPV). The government also secured the financing of its PIP for
2000-02 on the occasion of the donors' meeting organized in Geneva in
October 2000, with assistance from the UNDP.

26. Moreover, São Tomé and Príncipe has secured concessional nonproject
financing from the AfDB, the European Union, and other multilateral
and bilateral donors, and it hopes to reach its decision point in the
context of the enhanced HIPC Initiative in the very near term and receive
interim debt relief assistance. These additional resources will help
cover fully the financing need for 2001. Finally, the authorities will
request from Paris Club creditors a topping up to Cologne terms, with
a 90 percent reduction in the NPV of debt service, when São Tomé and
Príncipe reaches the decision point in the context of the enhanced HIPC
Initiative. They will seek comparable treatment from other bilateral
creditors. The resources freed through debt relief in the context of
the enhanced HIPC Initiative will be used to finance poverty reduction
expenditure, including in the priority education and health sectors.
To ensure a transparent and effective tracking of these outlays, the
government established, in November 2000, a special treasury account
at the central bank for the channeling of the interim HIPC Initiative
debt relief. In addition, a monitoring committee responsible for ensuring
transparency, accountability, and efficiency in the use of these resources
will be created by end-January 2001 with donors' participation.

27. To cover its financing needs, the government will continue to seek
grants and loans on highly concessional terms only. In this connection,
it will neither contract nor guarantee any new nonconcessional external
debt (i.e., with a grant element of less than 50 percent, with the exception
of Fund resources) with an original maturity of more than one year.
Furthermore, the government will neither contract nor guarantee external
debt, with an original maturity of up to and including one year. With
a view to normalizing its relations with its major external creditors
and donors, São Tomé and Príncipe settled all its external payments
arrears in 2000 and will remain current on its debt-service obligations
during the program period. The government recognizes that the nonaccumulation
of new external payments arrears is a continuous performance criterion.

Program monitoring

28. The government believes that the policies described in this letter
will enable it to attain the objectives of its program, but it is prepared
to take any additional measures that may be necessary to this end. During
the period of the three-year PRGF arrangement, the authorities will
consult with the Managing Director of the Fund on the adoption of any
measures that may be appropriate, either at their own initiative or
at the Managing Director's request. Moreover, following the period of
implementation of the arrangement, and as long as São Tomé and Príncipe
has outstanding financial obligations to the Fund arising from loans
disbursed under the arrangement, the government will consult periodically
with the Fund on São Tomé and Príncipe's economic and financial policies,
at its own initiative or at the request of the Managing Director.

29. To monitor progress in program implementation, the government has
established quantitative performance criteria, benchmarks, and indicators
for end-December 2000 and end-March and end-June 2001 (Table 1), as
well as structural performance criteria and benchmarks (Table 2). The
government will also provide the Fund with the data and information
listed in the attached Table 3, on a monthly basis, as well as any information
that the Fund may request for the purpose of monitoring progress in
the implementation of economic and financial policies and the measures
required to achieve the program objectives. During the program period,
the government will neither introduce nor expand restrictions on payments
or transfers in connection with current international transactions without
the approval of the Fund. It will neither introduce multiple exchange
rate practices nor enter into any bilateral payments agreements incompatible
with Article VIII of the Fund's Articles of Agreement. Lastly, the government
will not introduce or expand import restrictions for balance of payments
reasons.

30. In any event, the authorities of São Tomé and Príncipe will conduct
the second review of the program with the Fund no later than end-March
2001. The third review of the program should also be completed by end-September
2001.

31. The Economic Council, chaired by the Prime Minister and including
the Minister of Planning and Finance, the Minister of Economy, the Minister
of Infrastructures, Natural Resources and Environment, the Minister
of Foreign Affairs and Cooperation, and the Governor of the Central
Bank, will continue to coordinate the program.

During the period of the arrangement, we will maintain the customary
close policy dialogue with the Fund on the implementation of the program
under the SBA.

São Tomé and Príncipe: Quantitative Performance Criteria
and Benchmarks for the 2000-01 Program

2.

São Tomé and Príncipe : Structural Performance Criteria
and Benchmarks for the 2000-01 Program

3.

São Tomé and Príncipe: Data and Information To Be
Provided Monthly for the Monitoring of the Program

1The large plantations and enterprises slated for privatization
the by government are the following: (1) the coffee plantation (Monte
Café); (2) three cocoa plantations (Santa Margarida, Uba Budo, and Sundi);
and (3) the palm oil development company (EMOLVE).

SÃO TOMÉ AND PRÍNCIPE

Technical Memorandum of Understanding on the Three-Year
Arrangement Under the Poverty Reduction and Growth Facility

December 5, 2000

1. The purpose of this memorandum is to define the performance criteria
and quantitative and structural benchmarks adopted for monitoring the
implementation of the program supported by the Fund in the context of
the three-year arrangement under the Poverty Reduction and Growth Facility
(PRGF). This memorandum also sets out the data-reporting requirements
for monitoring the program. The program is outlined in the memorandum
of economic and financial policies for 2000, attached to the letter
dated March 24, 2000 from the Minister of Planning and Finance to the
Managing Director of the International Monetary Fund, and updated in
the letter of intent dated December 5, 2000, also signed by the Minister
of Planning and Finance. The performance criteria and benchmarks for
the program are listed in Tables 1 (quantitative criteria and benchmarks)
and 2 (structural criteria and benchmarks) attached to the aforementioned
letter of intent dated December 5, 2000. These definitions may need
to be revisited during the program reviews.

A. Quantitative Performance Criteria and Benchmarks

2. The quantitative performance criteria are set for the following
variables at end-December 2000 and end-June 2001:

(a) a floor on the primary fiscal balance, excluding foreign-financed
investments (cumulative from January 1);

(b) a ceiling on changes in net bank credit to the government (cumulative
from January 1);

(c) a ceiling on changes in the net domestic assets of the central
bank (cumulative from January 1);

(d) a floor on changes in the net international reserves position of
the central bank (cumulative from January 1, in millions of U.S. dollars);

(e) a ceiling on the government's stock of external payments arrears
(in millions of U.S. dollars);

(f) a ceiling on contracting or guaranteeing by the central government
of new nonconcessional debt (with a grant element of less than 50 percent)
with original maturity of more than one year (cumulative from January
1, in millions of U.S. dollars); and

(g) a ceiling on changes in outstanding stock of external debt of the
central government with original maturity of up to and including one
year (cumulative from January 1, in millions of U.S. dollars).

3. The quantitative benchmarks are set for the variables listed in
paragraph 2 above at end-March 2001.

4. The quantitative indicators are the following:

(a) a floor on total government revenue (cumulative from January
1); and

(b) a ceiling on government primary spending, excluding foreign-financed
investment (cumulative from January 1, on a commitment basis).

5. The primary fiscal balance, excluding foreign-financed investment,
is assessed in accordance with the statement prepared every month by
the Directorate of Finance of the Ministry of Planning and Finance on
government budget execution. In 1999, this balance was assessed at Db
4.327 billion, broken down as follows:

Primary balance, excluding foreign-financed
investment

4.327

Total revenue

64.605

Less: Primary spending, excluding
foreign-financed investment

60.279

6. Changes in net bank credit to the government are
assessed according to the monetary survey prepared by the central
bank. On June 30, 2000, outstanding net credit to the government was
assessed at Db -31.762 billion, broken down as follows:

Net bank credit to the government

-31.762

Central bank advances, including
use of IMF resources

45.791

Commercial bank advances

0.000

Less: Deposits in the BCSTP

73.936

Less: Deposits in commercial banks

-1.484

Less: Counterpart funds in commercial
banks

-2.134

7. Changes in the net domestic assets of the central
bank are assessed according to the monetary survey prepared by the
central bank. On June 30, 2000, the net domestic assets of the central
bank were assessed at Db -35.751 billion, broken down as follows:

Net domestic assets of the central bank

-35.751

Base money

44.375

Currency in circulation

18.454

Bank reserves

25.921

Less: Net external assets of the central
bank

-80.125

8. Changes in the net international reserves position
of the central bank are assessed according to the monetary survey
prepared by the central bank. Reserves assets are liquid, convertible-currency
claims of the central bank on nonresidents that are readily available.
Pledged or otherwise encumbered assets, including but not limited
to assets used as collateral (or guarantee for third-party external
liabilities), are excluded from reserves assets. Reserves liabilities
are defined as the short-term liabilities of the central bank owed
to nonresidents, including use of Fund resources. On June 30, 2000,
the net international reserves of the central bank were assessed at
US$9.8 million, broken down as follows:

Net international reserves of the central
bank (in millions of U.S. dollars)

9.800

Gross international reserves
of the central bank (in billions of dobras)

Divided
by the official exchange rate of the dollar on June 30
(Db 8,140, buying rate)

9. Under the program, a continuous performance criterion
of nonaccumulation of new external payments arrears will apply. The
government's external payments arrears are defined as all unpaid external
public debt obligations, excluding arrears on external debt service
pending the conclusion of debt-rescheduling agreements. Data on external
arrears will be estimated according to the central bank's external
debt unit. In 1999, the net reduction in external debt-service arrears
was estimated at US$2.5 million, and, at end-December 1999, the stock
of external debt arrears was estimated at US$54.8 million.

10. Performance criteria debt are: (1) the ceiling on
contracting and guaranteeing by the central government of new nonconcessional
external debt with original maturity of more than one year,1
and (2) the ceiling on the change in outstanding stock of external
debt of the central government with original maturity of up to and
including one year.2 The concessionality
of loans is assessed according to the currency- specific commercial
interest reference (CIRR), published by the Development Assistance
Committee of the Organization for Economic Cooperation and Development
(OECD). For loans with a maturity of at least 15 years, the 10-year
average CIRR should be used. For loans with shorter maturities, the
6-month average CIRR should be used. A loan is deemed to be on concessional
terms if, on the initial date of disbursement, the ratio between the
present value of the loan, calculated on the basis of the reference
interest rate, and the nominal value of the loan is less than 50 percent
(in other words, a grant element of at least 50 percent, with the
exception of Fund resources). By way of example, the reference interest
rates at end-1999 were as follows (6-month average):

(in percent)

U.S. dollar

7.04

Euro

5.47

SDR

5.59

The SDR-related CIRR will be used for currencies for
which a specific CIRR is not available. Debt rescheduling and debt
reorganization are excluded from the limits on nonconcessional borrowing.
The government of São Tomé and Príncipe will consult with the Fund
staff before assuming liabilities in circumstances where they are
uncertain of whether the instrument in question falls under the performance
criterion.

11. Total government revenue is assessed on a cash basis
in the table of central government financial operations prepared by
the Directorate of Finance. Total revenue for 1999 was estimated at
Db 64.605 billion, broken down as follows:

13. The automatic performance criteria adjustment mechanism
mentioned in footnote 2 of Table 1 concerns (1) the ceiling on changes
in net banking system credit to the government; (2) the ceiling on
changes in net domestic assets of the central bank; and (3) the ceiling
on changes in the net international reserves of the central bank.
The differences will be assessed by comparison with the data on disbursements
for (1) petroleum concessions, (2) program assistance, and (3) fishing
royalties, which are shown in a memorandum item at the bottom of Table
1. The ceilings on the primary balance of government financial operations
and for total government revenue will also be adjusted to reflect
differences vis-à-vis the data for fishing royalties disbursements.
If the difference is positive (disbursements greater than estimated),
the ceilings will be revised downward and the floor revised upward.
If the difference is negative (disbursements lower than estimated),
the ceilings will be revised upward and the floor revised downward.
Adjustments for negative differences will be limited to Db 20 billion
for program assistance (excluding IMF financing and food aid), and
to Db 2 billion for fishing royalties.

B. Structural Performance Criteria
and Benchmarks

14. The structural performance criteria are the following:

(a) the submission to parliament of a draft budget law for 2001 in
accordance with the program, as indicated in paragraph 8; and

(b) the adoption of a new mechanism under which adjustments in public
water and electricity rates reflect changes in production and distribution
costs, as indicated in paragraph 18 of the letter of intent.

15. The structural benchmarks are the following:

(a) the establishment of a single computerized system for civil service
management and payroll, as specified in paragraph 11 of the letter
of intent;

(b) the implementation of the mechanism by which adjustments in retail
prices of petroleum products reflect import prices and distribution
costs, as indicated in paragraph 9 of the letter of intent;

(c) the adoption of a three-year public investment program for 2001-03
in accordance with the program, as specified in paragraph 12 of the
letter of intent;

(d) the submission of monthly monetary data within six weeks of the
end of each month, as indicated in paragraph 23 of the letter of intent,
and

(e) the publication of the report of an external independent firm
on the audit of large contracts and bids for the period 1998-2000,
as described in paragraph 12 of the letter of intent.

16. The new adjustment mechanism for public water and electricity rates
will be brought into operation by decree. The price structure will cover
all production and distribution costs as well as the margin of the water
and electricity company (EMAE), based on the provisional accounts for
2001. The provisional accounts will balance consumption and resources,
without recourse to government subsidies.

17. It is agreed that the unified civil service/payroll computer system
will be in place by end-December 2000 and will be tested for three months
before the current payroll management system is discontinued.

18. The three-year public investment program (PIP) for 2001-03 will
be examined by the IMF and the World Bank. It is agreed that the PIP
will be consistent with the macroeconomic framework of the program,
and that the priorities will be education and health.

19. It is agreed that the retail prices of petroleum products will
be adjusted upon the arrival of each shipment to reflect the import
prices and the distribution costs of the petroleum product distribution
company (ENCO), using the automatic adjustment mechanism adopted in
1997.

20. Monthly monetary data will be e-mailed to the African Department
within six weeks after the end of each month.

C. Program Monitoring

21. Within two weeks after the end of each month, a monthly evaluation
report will be prepared by the authorities on the monitoring of program
indicators, benchmarks, and performance criteria. This report can be
used to assess the progress of program execution.

22. The technical committee in charge of monitoring the program will
regularly fax or e?mail the data necessary for program monitoring to
the IMF African Department. These data are listed in Table 3 attached
to the letter of intent dated December 5, 2000. Details of all new external
borrowing, including government guarantees and indicating terms of loans
and creditors, will also be provided to Fund staff on a monthly basis
within four weeks of the end of each month.

23. The technical monitoring committee will also provide the IMF African
Department with any information it deems necessary or that Fund staff
may request for program monitoring purposes.

1This performance criterion applies
not only to debt as defined in point 9 of the "Guidelines on Performance
Criteria with Respect to Foreign Debt", adopted on August 24, 2000,
but also to commitments contracted or guaranteed for which value has
not been received. 2The term "debt" has the meaning set
forth in point 9 of the "Guidelines on Performance Criteria with Respect
to Foreign Debt", adopted on August 24, 2000.